On Wednesday February 21, 2018, the United States Supreme Court rejected a Securities Exchange Commission regulation that sought to expand the definition of a whistleblower under the Dodd-Frank Act, and thereby resolved a split in the Circuit Courts. In Digital Realty Trust v. Somers, the Court held that anti-retaliation protection afforded to a whistleblower under the Dodd-Frank Act is available only to an individual who provides information relating to a violation of the securities laws to the Securities and Exchange Commission before suffering adverse employment action. In reversing a Ninth Circuit decision, the Court held that where that statute is clear as written, there is no room for regulatory or judicial reinterpretation. 583 U.S. __ (2018).

Justice Ginsburg delivered the Court’s unanimous opinion, with concurrences by Justices Sotomayor and Thomas. The opinion contrasted the purposes and language of two statutes establishing special status and potential reward for individuals disclosing misconduct in the form of violations of securities laws by companies. The 2002 Sarbanes-Oxley Act, enacted on the heels of the massive accounting-related securities frauds highlighted by Enron and WorldCom, “sought to disturb ‘the corporate code of silence’ that ‘discourage[d] employees from reporting fraudulent behavior not only to the proper authorities, such as the FBI and SEC, but even internally.” Digital Realty Trust, quoting Lawson v. Fidelity. Sarbanes-Oxley provided remedies from employer retaliation to a “whistleblower”, defined as an employee who reports misconduct to the SEC, any other federal agency of an internal supervisor. Responding to the financial meltdown of the Great Recession, the Dodd-Frank Act encouraged SEC enforcement by defining a “whistleblower” as a person who provides “information relating to a violation of the securities laws to the SEC.” Dodd-Frank’s remedies for employer retaliation are stronger than those provided in Sarbanes-Oxley: whistleblowers may recover double backpay plus interest on claims of retaliation, are not obligated to bring claims before the Secretary of Labor within 90 days of the retaliatory action, have no administrative exhaustion obligations, and may bring federal district court claims against their employers or former employers within six years of any adverse action. In addition a Dodd-Frank whistleblower can receive an award of a portion of any recovery by the SEC resulting from the whistleblowing.

At issue in Digital Realty was the propriety of an SEC rule that expanded Dodd-Frank’s anti-retaliation protections to apply to persons who did not provide any information to the SEC, provided those persons did provide information in other forms, including internal reporting protected by Sarbanes-Oxley. The plaintiff, Somers, claimed his employment was terminated shortly after reporting suspected securities law violations to senior management. He made no complaint to the Secretary of Labor, so was not eligible for whistleblower protection under Sarbanes-Oxley. Therefore, his only recourse was to claim status as a whistleblower under Dodd-Frank, despite never having reported to the SEC. The Court rejected the SEC’s regulation amending and expanding the express definition of a whistleblower in the Dodd-Frank Act and thereby dismissed Somer’s claim.

Digital Realty may create an incentive for potential whistleblowers to go directly to the SEC, rather than first airing their complaints to management. If an employee wants to take advantage of Dodd-Frank’s strong anti-retaliation remedies (e.g., double damages, longer statute of limitations, and no administrative exhaustion), the employee may choose not to risk being terminated against before reporting to the SEC, and so may choose to go to the SEC before or instead of using any internal reporting procedures.

Employers should refrain from potential interference with an employee’s ability to report a possible violation of federal law or regulation to any governmental agency or entity. Instead, employers should strive to maintain open lines of communications with their employees in order to ensure that they are on notice of any potential complaints that an employee may bring to a federal agency.